what is a federal tax levy

What is a Tax Levy?

Key Takeaways:

  • A tax levy is a legal strategy used by the Internal Revenue Service to claim payment on unpaid tax debt by seizing property or assets from delinquent taxpayers.

  • Before issuing a tax levy, the IRS must send a Notice and Demand for Payment and the taxpayer must refuse to pay or settle their tax bill. the IRS must then issue a Final Notice of Intent to Levy and Notice of Your Right to a Hearing 30 days in advance. finally, the IRS must send another notice of their plan to contact third parties for additional information about the taxpayer’s unpaid tax debt.

  • A tax lien is a legal claim on a property that secures payment of tax debt in the future. A tax levy is a process of following through on the seizure of assets.

  • If you receive an IRS tax levy you may experience a wage garnishment, bank levies, the legal seizure of your property, or your tax refunds being taken to pay toward your unpaid taxes.

  • While a tax levy allows the IRS to claim payment on unpaid tax debt by seizing almost any personal assets, a bank account levy specifically targets the taxpayer’s bank account to secure tax payment.

  • A tax levy can be removed when you pay the tax bill in full, organize an IRS installment agreement, settle with an offer in compromise, apply to appeal with the IRS, or file for bankruptcy.

What Are Tax Levies?

A tax levy is a strategy that can be used by the Internal Revenue Service to secure payment on an unpaid tax debt by seizing property or assets from delinquent taxpayers. If an individual receives a tax levy, their money may be taken from their bank account, garnished through employee wages, or seized through the property they own.

When can the IRS issue a tax levy on your account?

According to the Internal Revenue Code (IRC), the IRS can take action against your accounts to collect payment for unpaid taxes. If you are behind on paying taxes owed and have yet to communicate with the IRS to determine a method to settle or pay back the debt, the IRS may determine that a levy is the most appropriate action to gain a legal claim on what is owed. During this situation, an IRS tax levy may be placed on any property you own or have an interest in.

Before the IRS issues a tax levy, four events must occur:

  1. The Internal Revenue Service agency calculates the total tax debt an individual owes and issues a “Notice and Demand for Payment” to the taxpayer.

  2. The recipient taxpayer fails or refuses to pay the full tax bill on time.

  3. The IRS agency issues two additional documents to the taxpayer: one is a “Final Notice of Intent to Levy,” and the other is a “Notice of Your Right to a Hearing.” These two documents must be sent at least 30 days before the tax levy is issued. These two issues of notice can either be delivered in person or sent to the last known address of the person’s home or place of work. If the IRS levies your state tax refund, however, the levy may be placed before sending the notice of intent.

  4. The IRS agency sends the taxpayer another notice explaining their plan to contact third parties, such as your employer, banks, family, friends, or neighbors, to learn more information about the taxpayer’s unpaid tax debt.

Tax Levy vs. Tax Lien

Normally, a federal tax lien is placed on an account before a tax levy is issued. A tax lien is a legal claim that is placed on a property to secure payment of tax debt in the future. If a tax lien is placed on your accounts, the agency that placed the lien has the legal authority to seize your assets before another agency could attempt to secure tax payments through this method. It is also beneficial to note that a federal tax lien will appear on a public record and can also negatively impact your credit score.

Due to the permanent record of tax liens, having this history on the property record can make it difficult if you ever wanted to sell or refinance an asset in the future. If the IRS has a claim on a property, lenders are usually reluctant to approve a loan on an asset with outstanding tax liens.

Compared to a federal tax lien in which an entity acquires the legal claim to potentially seize property in the future, tax levies are when a creditor follows through on the seizure of assets. A tax levy is not a public record and therefore should not impact your credit score, however, losing control of these assets can further an individual’s financial hardship moving forward.

What Can Happen To You If You Receive An IRS Tax Levy

If your account is issued with an IRS levy, there are several consequences that can directly impact your life. Here are some factors to look out for:

Your paycheck could slightly or significantly shrink

Wage garnishment is a common method the IRS uses to collect funds to pay toward your tax liability. If you receive a wage garnishment, your employer will be instructed to send a portion of your paychecks directly to the IRS each month. This will continue to occur until the total tax debt has been paid.

Your personal bank accounts may be frozen

Out of all the methods the IRS uses to collect unpaid tax debts, seizing funds directly from bank accounts is a common strategy. This process is known as a bank levy. The typical protocol for bank levies involves the IRS contacting your bank and requesting they freeze your bank account for 21 days. After this 21-day hold period on your bank account is complete, if the tax debt has not been paid or the taxpayer has not settled with the IRS, the bank is permitted to send some or all of your money directly to the IRS to contribute toward your unpaid tax debt.

Your home and property may be in jeopardy

Although it is generally rare for the IRS to go so far as to seize a taxpayer’s house as a method of collecting tax payments because it can cause serious financial hardship, this consequence can happen. During a property seizure, the IRS can seize your house, car, boat, or other forms of property, sell that asset, and use the profits to apply toward your delinquent tax debt. While many assets can be levied by the IRS through a legal seizure, there are some forms of property that remain off the table. For example, some unemployment benefits, disability payments, child support payments, and some other public assistance payments usually cannot be levied by the IRS. Additionally, some unopened mail and some school or work-related household items are also safe from tax levies.

Your tax refunds may be taken from you

When a taxpayer owes money to the IRS, they may find that their tax refunds are lower than usual because the IRS can hold that money they would have received and apply it toward their owed taxes. The IRS has the authority to levy federal, state, and municipal tax refunds and redirect the refund money to be sent directly to the IRS as opposed to the taxpayer’s bank account.

Alternative approaches to tax levies

The IRS and other tax authorities sometimes must utilize additional means to levy property to collect tax payments when the taxpayer has little cash to satisfy their debts. Some other forms of value they can sometimes seize include business assets or Social Security benefits.

what is a levy tax

Tax Levy vs. Bank Levy

An IRS tax levy allows creditors to collect payment for tax debts by seizing property or assets from the delinquent taxpayer. A bank levy is a specific type of IRS levy that targets a taxpayer’s bank accounts. During a bank levy, the Internal Revenue Code provides the taxpayer with a 21-day waiting period during which they can choose to comply with the levy. Within this 21-day waiting period, the taxpayer can choose to pay their tax bill, contact the IRS to organize a payment plan, or notify the IRS that there are errors in the bank account levy and they wish to appeal.

When a debtor first receives a bank levy, their bank account will be frozen until action has been taken toward resolving the tax debt. Without intervention, the bank levy will remain on their accounts until the tax liability has been paid in full. If the tax balance is not paid in full, the creditor can then seize funds from the bank account to apply toward the tax debt.

Creditors have the ability to issue a bank levy as many times as it takes to secure payment of an outstanding tax balance. For this reason, it is always best to pay your tax bill in full to avoid any tax levies or bank levies being placed on your accounts.

How To Stop A Tax Levy

If the IRS issues a levy on your account it is important to explore your options to remove that levy as soon as possible to avoid the accruement of additional debt, or worse, losing ownership of your assets. Here are some ways you can get rid of a tax levy:

Pay your tax bill in full

The best and most effective method of resolving a tax levy is to pay what you owe in taxes to the IRS. It may seem obvious, but sometimes this option can be the only way to remove a tax levy or tax lien. If you are able to pay your tax bill when you receive levy notice from the IRS, you can immediately resolve your tax issues with the IRS and avoid the seizure of your property or other assets. However, even if you cannot afford to pay your total tax bill, it is extremely important to cooperate with the collection action and communicate with the IRS if necessary. The IRS has several forms of tax debt relief that eligible taxpayers can utilize to manage their tax liability and pay taxes owed to the IRS without creating additional financial hardship for the taxpayer.

Organize an IRS installment agreement

IRS payment plans are one of the most common forms of tax debt relief that allows taxpayers to pay their owed taxes and potentially allow for a tax levy release. If a taxpayer allows the IRS to withdraw at least three consecutive payments directly from their bank account through a process called a direct debit installment agreement, the IRS may agree to remove the federal tax lien from public record. It is beneficial to remember that even if the IRS agrees to a payment plan, the tax balance will continue to accrue interest and penalties until the tax debt is fully paid off. The fees to apply for an installment agreement range from $0 to $225 depending on your income level and which plan you qualify for.

Apply for an offer in compromise

An offer in compromise, or OIC, is a request you can send to the IRS to settle your unpaid back taxes for less than what you owe. Taxpayers should be warned that this form of tax relief is quite rare and the IRS only approves a small number of requests each year. Additionally, taxpayers must be in good standing with the IRS to be considered for an offer in compromise. This involves being up to date in filing all tax returns as well as making all estimated tax payments for the current tax year. Taxpayers who have filed for bankruptcy or who are being audited may not be considered for an offer in compromise.

File for an appeal with the IRS

If you disagree with the terms outlined in the IRS notice of levy or lien, you can file for an appeal with the IRS Office of Appeals and ask for a collection due process hearing to review your case. Additionally, if you disagree with the decision an IRS employee made regarding applying a tax levy on your accounts, you can request to speak with that employee’s manager. From there, if you also disagree with the IRS employee’s manager in regard to the tax levy, you can request that the IRS Office of Appeals reviews your case.

File for bankruptcy

Although this option may be a last resort, filing for bankruptcy is a plausible method to remove a tax levy and reduce your tax debt. However, filing for bankruptcy is a long and arduous process, so if another tax relief option is available to you, you should start there first.

Can a tax levy be released?

If you file an appeal with the Internal Revenue Service it is possible to get that tax levy released from your accounts. Appealing when you receive an IRS notice of intent to levy can also help prevent a tax levy from being placed in the future. Additionally, during an appeal, taxpayers have the opportunity to request that their levied assets be returned to them.

When you appeal with the IRS Independent Office of Appeals, you must respond to the notice of intent to levy as soon as possible and organize the payment of your tax bill and request the removal of the tax levy. Once the tax bill is paid, the levies should be released from your accounts.

Sometimes there are other instances in which the tax levy can be removed based on your appeal. Examples of reasons the IRS will remove a levy include:

  • The tax bill has been paid in full

  • The levy was issued before the collections period ended

  • The taxpayer would be able to pay their tax bill if the levy was released

  • An installment agreement was agreed upon and the terms request the release of the levy

  • The property is valued at more than what the taxpayer owes and the release of the levy would not prevent the IRS from being able to collect the amount owed.

The Internal Revenue Service may hold off the tax collections process if the tax levy would put the taxpayer in significant economic hardship. However, even though collections may be delayed, it is important to keep in mind that you will have to deal with your tax debt eventually and pay what you owe in income taxes.

Being issued a tax levy from the IRS can make you feel scared or out of control of your finances, but as long as you respond to the steps accordingly and work toward paying your tax liability, you will be able to remove the levy and restore good standing with the IRS. If you find yourself in a situation in which you need help communicating with the Internal Revenue Service to remove a tax levy on your account, consulting with tax professionals at Ideal Tax can give you the confidence to organize your finances and pay what you owe to the IRS without

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